The Reserve Bank of India (RBI) on Tuesday, left interest rates unchanged as it supports a battered rupee but said that it will roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.
RBI left its policy repo rate at 7.25 percent but took a dovish tone as it cut its growth forecast for Asia's third-largest economy to 5.5 percent for the fiscal year, from 5.7 percent previously.
It held the cash reserve ratio at 4 percent.
"Based on an assessment of the present and prospective micro economic situation, we have decided to keep the repo rate, under the liquidity adjustment facility (LAF), also the cash reserve ratio (CRR) unchanged," RBI Governor D Subbarao said.
He also said that recent liquidity tightening steps would be rolled back in a calibrated manner to enable monetary policy to revert to supporting growth with continuing vigil on inflation.
"The liquidity tightening measures, instituted by the Reserve Bank over the last weeks, are aimed at checking undue volatility in the foreign exchange market. They will be rolled back in a calibrated manner as stability is restored to the foreign exchange market," he added.
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The rupee fell to a record low 61.21 to the dollar on July 8, when it was down about 10 percent since the start of 2013.
While India has succeeded in stabilizing the rupee at 59.42 on July 29, the surge in short-term interest rates has squeezed funding for corporate borrowers and prompted many economists to cut their growth forecasts.
India grew at 5 percent in the fiscal year that ended in March, its weakest in a decade, which had prompted the RBI to cut rates by 125 basis points since last year, although it paused in June, amid worries of high consumer price inflation.
"Global growth has been tepid, with consequent adverse spill overs on India's exports, manufacturing and services. On the basis of the above considerations the growth projection for the current year is revised downwards from 5.7 percent to 5.5 percent," D Subbarao added.
He said it aims to keep headline wholesale price index inflation at around 5 percent by the end of the fiscal year in March and 3 percent over the medium term. Annual wholesale inflation rose slightly to about 4.9 percent in June.
"On the expectation that especial and temporary distribution of monsoon during the rest of season will be normal, the Reserve Bank will endeavour to condition the evolution of inflation to level of five percent by March 2014," he added.
The last policy statement of RBI Governor D Subbarao's five-year tenure, unless it is extended, continued to call on the government to take urgent steps to bring down the current account deficit, which hit a record 4.8 percent of GDP in the last fiscal year.
The current account gap makes India especially vulnerable as global investors move away from emerging markets in anticipation of a winding down of loose U.S. monetary policy.
